Personal tax planning 3: Supplementary Retirement Scheme

Welcome to part 3 of my basic personal income tax planning series! In this series of posts I hope to cover the following topics:

1. Tax reliefs
2. CPF Cash Top Up
3. Supplementary Retirement Scheme (SRS)
4. Bringing it all together – How to best utilise these reliefs to your advantage

In this part, I will cover how contributing to your SRS account can be used as a tool to mitigate your tax bill. Here’s a brief introduction to SRS.

What is SRS?

SRS is a government initiative to complement the CPF system and incentivise Singaporeans and PRs to save and invest more for retirement. It is completely privately operated and run by the 3 local banks – DBS, OCBC and UOB.

SRS is essentially a tax deferred investment vehicle. What this means is that contributions to the account (which is assumed to be derived from your income) are not subject to tax when contributed, but will be subject to tax years later when withdrawals are made. The beauty of this is that you can plan to commence withdrawals when you have retired and don’t have a high amount of taxable income, thus minimising your tax liability on withdrawal.

Some key points to note about SRS:

1. General
   1. Statutory retirement age refers to the statutory retirement age at the time of your first contribution. This is currently 62 years old.
   2. You can only have 1 SRS account.
   3. The agent banks do charge fees on the transactions and account maintenance. The fee schedule for DBS and UOB can be found here and here. OCBC does not publish a fee schedule but based on my personal experience, there’s no account maintenance fees but I can’t recall the transaction costs but it should be comparable to DBS and UOB.
2. Contributions
   1. Current annual contribution cap is $15,300.
   2. Contributions can be used for investments in stocks, bonds, gold, unit trusts and government treasuries.
   3. Cash balances are paid interest based on the prevailing bank interest rates.
3. Withdrawals
   1. Early withdrawals before statutory retirement age are 100% subject to tax. It is also subject to a 5% penalty fee.
   2. 50% of withdrawals after statutory retirement age is subject to tax, ie if you withdraw $40,000, only $20,000 is subject to tax.
   3. You are given 10 years from the year you make your first withdrawal to completely withdraw your SRS funds.
   4. Point 3(b) when combined with point 3(c) plus the fact that the first $20,000 of taxable income in a given year is tax free, means that you can withdraw up to $400,000 worth of funds tax-free over 10 years, assuming you have no other taxable income sources.
   5. Withdrawals after statutory retirement age can be made in the form of cash or investments, subject to certain conditions.

Tax Relief

As mentioned in part 1, you will receive a dollar for dollar tax relief up to $15,300 per annum (due to current contribution caps) for your SRS contributions. Contributions can be made via iBanking by simply transferring the funds into the SRS account.

There’s nothing complicated about this relief, you just need to consider the Pros and Cons before contributing to SRS.

Pros and Cons

Given the above, you should aim to accumulate no more than $400,000 of investments and contributions within your SRS account to maximise the tax benefits of this scheme. Of course, if you are fine with paying a bit of taxes, it is perfectly fine to disregard this target as you are still paying a relatively low tax rate as illustrated below.

Conclusion

The Supplementary Retirement Scheme is a tax deferred investment account that allows you defer your current taxes (through tax reliefs) to a future date while helping you save for retirement. This enables you to do some tax planning to mitigate your annual tax bill.

Now that you know about the 3 main tools at your disposal for personal tax planning, my last post of this series will examine the overall strategy that I employ for my own taxes as well as the priority I assign to each tax planning tool. Until next time.

Happy Hunting
KK